No insider dealing offence committed where shares of a listed company were traded by officers of the company prior to delisting

Regional Administrative Court of Lazio-Rome No 6257, 10 July 2012 – Annulment of sanctions issued by Consob

This judgment, published only recently, addresses the issue of "self insider trading" and overturns a decision issued by Consob (the Italian financial regulator). The judgment confirms that no insider dealing offence is committed where shares of a listed company were traded by officers of the company, prior to a delisting. This was because Article 187-bis of the Consolidated Law of Finance (CLF) does not apply where the person who creates the insider information (here, the delisting plan) then deals in the stock in advance of the delisting in order to further the delisting objective.

Background facts

The trade under scrutiny by Consob was put in place between January and February 2008 by various vehicles ultimately belonging to the president and managing director (the Ultimate Owners) of a listed company (the Target). The Target was the holding company of a large industrial group which was active in the food field. In the context of a delisting programme for Target, in March 2008 the Ultimate Owners set up an SPV and launched a public offer to buy all the shares of the Target. The public offer concluded positively and the Target was delisted.

Consob investigated a trade that had occurred a couple of months prior to the public offer being announced. In this trade, a buyer had purchased a large number of shares in the Target at a price that was lower than the public offer. Consob discovered that the buyer was the Ultimate Owners, who therefore saved about EUR 144.4 million (being the difference between price paid during the trade and the higher public offer price). The Ultimate Owners, together with the vehicles that enacted the trade, were charged with insider trading and an administrative sanction of EUR 1500.000 was imposed. Steps by criminal prosecutors for a possible investigation are not reported. As a matter of Italian law, insider trading is a criminal offence if wilful misconduct ("dolo") can be established, otherwise the conduct is just subject to an administrative sanction.

Article 187 CLF provides that administrative monetary sanctions are imposed on those persons who, possessing inside information by virtue of their membership of the administrative, management or supervisory bodies of an issuer, their holding in the capital of an issuer or the exercise of their employment, profession or duties, (including public duties), buy, sell or carry out other transactions involving, directly or indirectly, financial instruments using such information for their own or a third party's benefit.

Consob argued that:

(a) the Ultimate Owners and the vehicles made use of inside information to their benefit, the inside information – not yet disclosed to the market – being the delisting programme for the Target;
(b) the Ultimate Owners saved about EUR 144.4 million, this being the difference between the price paid to accrued shares of the Target prior to the public tender being announced and the price offered by the SPV during the public tender.

Consob took the view that Article 187-bis CLF applies to "self insider trading", ie a case where the inside information is created by the person who enacts the trades notwithstanding that he or she holds one of the roles identified in the mentioned provision. Consob relied on the XXX considerando to Directive 2003/6/EC, which reads: "Since the acquisition or disposal of financial instruments necessarily involves a prior decision to acquire or dispose taken by the person who undertakes one or other of these operations, the carrying out of this acquisition or disposal should not be deemed in itself to constitute the use of inside information".

Regional Administrative Court of Lazio-Rome

The Consob decision was appealed before the Regional Administrative Court of Lazio-Rome,¹ which overruled the Consob decision and lifted all sanctions.

The court ruled that, as a matter of fact, it had not been established conclusively that, at the time the trade was enacted, the delisting programme was finalised. Consequently it could not be said that inside information about the delisting had been formed. Whilst discussions with advisers had started, no decision had been taken yet on the structure or timing of the delisting programme nor the price that would be offered via the public tender.

The court found that the Ultimate Owners were the creators of the inside information as identified by Consob, ie the planned delisting programme. They had been the source of the original inside information. There could be no charge for insider trading when the information is used for the purposes for which it was originally created (in this case, the delisting programme).

The court noted that the saving achieved by the Ultimate Owners (through the vehicles) by purchasing the shares in advance was legitimate. This was because it only became a benefit retrospectively, ie after the public tender was launched.

Conduct potentially caught by insider trading provisions must be assessed on a case-by-case basis. The judgment confirms that there is no "self insider trading" where the information is used by its creator in order to facilitate the realisation of a devised transaction (ie the delisting programme).

A key factor for the court was that the trade in question was a preparatory step for a delisting programme that was subsequently successfully enacted. The outcome would have been different where, for example, the director of a listed company learns of an unfavourable judgment being issued about pending litigation and sells shares prior to disclosure to the market.

It is worth noting that the Regional Administrative Court of Lazio-Rome took the view that no inside information was formed at the time of the preparatory trade on the shares of the Target. Commentators on the judgment have emphasised that trades enacted (directly or through vehicles) by persons who serve as directors, statutory auditors etc. of a listed company give rise to sensitive and difficult issues which have to be assessed on a case-by-case basis taking into account the factual matrix and nature of the inside information under scrutiny.

Footnotes

_{1. Note that, after the decision issued by the Constitutional Court in June 2012, charges issued by Consob are currently subject to the ordinary courts (ie Court of Appeal).}